Moody’s warns vs prolonged lockdown’s impact on banks

Revising its outlook for the Philippine banking system from stable to negative, Moody’s Investors Service warned that the impact of a prolonged lockdown on companies’ ability to pay debt would cascade to the banking sector’s profitability.

In a report on Thursday, the debt watcher said that the enhanced community quarantine placed all over Luzon has been constricting economic activities, which would materially impact economic growth this year, including the banking industry.

“The number of confirmed coronavirus cases is increasing so restrictions on activity may remain in place for a prolonged period, further weakening the economic outlook,” Moody’s said.

The credit-rating agency warned that even if one of the big conglomerates default on bank loans, this could degrade asset quality in the overall banking system because the borrowings were “heavily concentrated” on the them.

While Moody’s said that most large companies could withstand the disruptions, the prolonged lock down, however, would be a bane for smaller firms’ debt payment capacity.

It added that quality of loans to small businesses and medium-sized enterprises might degrade due to “limited buffers against stress.”

With asset quality at risk, Moody’s said that Philippine banks’ credit costs would escalate, potentially dragging the sector’s bottom-line figures in the process.

“Philippine banks credit costs have been among the lowest in Asia, benefiting from healthy economic conditions, and this has supported profitability despite low pre-provisioning profit as a percentage of assets compared to banks in other emerging markets in the region,” it noted.

Moody’s, meanwhile, said that capitalization will remain stable given that rated local banks have an average Common Equity Tier 1 capital ratio of 13.7 percent as of end-2019.

“However, any material downgrade of credit ratings of borrowers would increase the capital that banks need to set aside for those exposures, which would erode capitalization,” the debt watcher added.

The credit-rating agency was expecting that support from the government will remain strong amid the pandemic.

RCBC’s Chief Economist Michael L. Ricafort agreed that current
economic slowdown locally and across the world prompted Moody’s to change its outlook on the Philippine banking sector.

“The revision of the outlook by Moody’s could be due to slower economic growth locally and worldwide largely due to the coronavirus outbreak, as other major global credit rating agencies also made outlook revisions on the banking industry of other Asean/Asian countries,” Ricafort said.

“The Philippine banking industry has been one of the most profitable industries in the country and has strong financial position and well capitalized, with capital ratios way above the minimum requirements set by both local and international regulators,” he added.

As of April 2, Moody’s rated the baseline credit assessment of BDO Unibank Inc., Metropolitan Bank & Trust Co. and Bank of the Philippine Islands with baa2; Land Bank of the Philippines, ba1; Philippine National Bank, China Banking Corp., Security Bank Corp., Union Bank of the Philippines and Rizal Commercial Banking Corp., baa3; and, United Coconut Planters Bank, b2.